India’s growing community of affluent investors is gradually moving beyond traditional avenues such as stocks, bonds and gold. Alternative investments are becoming an increasingly important part of portfolios held by high-net-worth individuals (HNIs) and family offices.
Shekhar Daga, Head–Private Capital at ICICI Prudential AMC, said the trend is being supported by two developments: existing HNIs and family offices are raising their exposure to alternative assets, while a growing number of investors are entering the HNI category.
Why More Wealthy Investors Are Exploring Alternatives
As households move from the middle class to the upper-middle-class segment and eventually into the HNI bracket, their investment strategies typically become more diversified.
Daga said investors at higher wealth levels tend to look beyond conventional asset classes and explore opportunities that can potentially provide diversification and differentiated risk-return profiles.
Over the last four years, HNIs have steadily increased their allocation towards alternative investments, reflecting the broader evolution of India’s wealth-management landscape.
The alternatives segment generally covers products such as Alternative Investment Funds (AIFs) and Portfolio Management Services (PMS). Depending on the strategy, AIFs can provide access to areas including listed shares, real estate and private capital.
Private capital can include both private equity and private credit. Private equity involves investing in privately held businesses, while private credit typically involves providing financing to companies through investment funds instead of traditional banks.
However, Daga stressed that investors should not view private capital as one single category because the risk and return profile can vary significantly between strategies.
Private Credit Has Several Different Strategies
Private credit is a broad segment that includes performing credit, real estate-backed lending, special-situation strategies, distressed credit and venture debt.
Each of these strategies comes with its own level of risk, expected return and investment horizon. As a result, investors need to examine what an alternative investment actually holds rather than making decisions based simply on the label “alternatives”.
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Private Credit Market Could See Strong Long-Term Growth
Daga expects India’s alternatives industry to expand at an annual rate of around 25% over the coming decade.
One factor behind this outlook is the improving financial health of Indian companies. Borrower behaviour has also improved following the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016, according to Daga.
The sector has also started attracting international investors, reflecting growing institutional interest in India’s private credit opportunity.
A key reason for the demand for private credit is the financing gap left by conventional lenders. Banks and NBFCs can provide funding for areas such as working capital and capital expenditure, but regulations may restrict them from financing certain transactions.
For example, some acquisitions involving equity shares or specific land purchases may require funding structures that traditional lenders cannot provide.
This gap creates an opportunity for private credit funds and other flexible capital providers to offer customised financing solutions, particularly in the performing-credit segment.
Real Estate Offers Another Alternative Investment Opportunity
Investment opportunities are also emerging across India’s real estate market, although the right strategy depends on an investor’s risk tolerance and return expectations.
Daga pointed to income-producing commercial properties and premium residential projects as areas that could offer opportunities.
Demand for Grade A office properties has supported office yields, while Mumbai’s luxury residential redevelopment market has attracted both domestic and overseas capital.
The residential opportunity is being supported by several factors, including strong demand from end-users, limited availability of fresh land and rising aspirations among homebuyers.
Performing credit is another area that continues to attract attention. Such investments can provide structured, senior and asset-backed financing for companies seeking funds for expansion, acquisitions and other strategic requirements.
Exit Risk Is an Important Factor for HNI Investors
While alternative investments can provide diversification, investors should also understand the risks involved—particularly liquidity and exit risk.
Unlike mutual funds, many private-market investments do not have a deep secondary market. Investors generally cannot redeem their holdings whenever they want, which can make the investment horizon considerably longer.
Daga therefore recommends that investors focus on protecting their principal and carefully examine the safeguards built into an investment strategy.
Before investing, HNIs should consider factors such as the manager’s historical performance across different economic cycles, the underwriting framework, the margin of safety and the quality of collateral supporting the investment.
How Could Investors Allocate Their Portfolios?
There is no single asset-allocation strategy suitable for every HNI, as the appropriate mix depends on factors such as financial goals, investment horizon, liquidity requirements and risk appetite.
As an illustration, a diversified portfolio could potentially consist of 40% listed equities, 40% listed debt and 20% private capital, although individual investors may require a very different allocation based on their circumstances.
The growing interest in AIFs, private credit and real estate highlights how India’s affluent investor base is becoming more sophisticated. As wealth increases, HNIs are increasingly looking for ways to diversify beyond traditional investments and gain exposure to private-market opportunities.